What is this, a stock price for ants? Abercrombie vs. American Eagle Walk-Off! $ANF and $AEO

As I reflect on the past year, one category that has seriously underperformed but may now be timely is Consumer Discretionary. I have to admit that I was wrong. I thought that Jerome Powell would be cutting interest rates, that this would reinvigorate the housing market, and at a 5.5% 30-year mortgage, the middle class would tap into home equity. The influx of home equity cash into the consumer economy would cause a boom. Things might still unfold in this way, but being more than a year early is as bad as being wrong.

While the European Central Bank has cut their benchmark rates from 4.0% to 2.0%, the Fed has only cut from 5.25% to 4.25%, higher still than where the ECB started. I’ll hold back my opinion on where I think rates should be, I’m just trying to think about the consequences of where they will be.

More than once, rumors have been floated that Jerome Powell will resign before the end of his term, and these rumors are probably fake news. But his term ends in May of 2026, which is only 11 months away. So we might see that 5.5% 30-year mortgage and an explosion of the consumer economy soon enough to start thinking about allocating capital in anticipation. If Stanley Druckenmiller is correct, and odds are good he is, we have to “visualize the situation 18 months from now.”

As my wife will corroborate, I don’t understand fashion. So analyzing apparel firms is a step outside of my comfort zone. But the chart on American Eagle Outfitters (AEO) is too juicy to ignore, and their contrast with Abercrombie and Fitch (ANF) makes a good comparison.

AEO Stock Price:

Am I crazy or does the stock price chart of American Eagle Outfitters look like a money machine? Sometimes these money machines stop working just when I decide to take a position, *cough* Peabody Energy (BTU) *cough*. But other times, it’s a coiled spring that is ready to double or triple. It is worth keeping an eye on the health of the business, and things are looking very respectable at AEO.

AEO Revenue:

Sales are growing, albeit cyclically, and we can see the temporary Covid impact, but American Eagle doesn’t appear to be a brand in decline. A bit of chatting with some large language models helps to reassure me that I’m not punting too far outside of my comfort zone, they agree that AEO does a good business. The price to sales ratio is 0.33x, and on a rebound, would hit somewhere between historical peaks of 0.8x and 1.2x, but probably toward the lower end of the range given that interest rates are no longer zero.

American Eagle Outfitters is the sort of company that I find attractive, a decent and growing business, trading at the lower end of their historical range. But it isn’t the sort of thing that gets an enormous amount of attention like Abercrombie and Fitch (ANF).

ANF Stock Price:

Trading at a price to sales ratio of 0.79x, Abercrombie and Fitch is more than twice as expensive as American Eagle, but ANF traded much higher just last year, in 2024 it reached a price to sales ratio of over 2.0x. Is that past peak repeatable? Maybe, but only if year over year growth can stay around 15%.

Abercrombie had a bit of an identity crisis after news circulated that the former CEO had been sexually assaulting the male models. To everyone’s surprise, Abercrombie pulled a rabbit out of their hat, and reinvented their brand, targeting 30 and 40 year olds. Maybe they are thrilled that Abercrombie is still catering to them after all these years?

The models mostly have their clothes on these days, and the customer seems to be able to look past a brand built on sexual exploitation. Not just look past, but sales have exploded since news of the class action lawsuit story broke in 2023.

ANF Revenue:

But is that sales growth sustainable? I don’t think that it is in the way that American Eagle Outfitters is. It seems to me that ANF and AEO is the classic tortoise and hare story, with ANF playing the role of the hare. ANF has the better year over year growth today, like it had in 2013, and then lost. AEO has the better track record of stable growth over time, and a cheaper valuation relative to its own past. But ANF has the meme stock attention today, and AEO is not nearly as popular on Twitter.

American Eagle and Abercrombie have very different long term strategies. AEO is focusing on the youth, which is always hit or miss, it’s hard to predict what will resonate with young people. Meanwhile, ANF is following their legacy customers as they age; it reminds me of a rock & roll radio station from my hometown. They never changed the music, they just started calling themselves a classic rock station, and the listeners aged along with the DJs.

Abercrombie is targeting upper-middle class consumers, mostly urban, while American Eagle is a bit more down market, and has appeal farther out to rural areas with more denim. As the United States has been experiencing a K-shaped economy, where the upper class does better and the lower class does worse, Abercrombie has a tailwind and American Eagle has a headwind. Will deportations affect blue collar wages to the point that consumer power shifts to flyover country? If so, then AEO could be a huge beneficiary. The safer bet might be that the upper-middle class will continue to buy ANF’s new tailored pants for the office.

The tariff situation is probably contributing to the currently low stock price. But over time, AEO and ANF can relocate manufacturing to countries that have negotiated a 10% tariff, and that sort of a cost increase won’t affect their businesses nearly as much as their fashion decisions. AEO anticipates increased costs of about $20 million per quarter, starting in Q3 of this year. But again, over time manufacturing can adjust slowly.

Neither company has any insider buying behavior, but this is the normal state of things. Inside purchases are rare, most corporate executives think of themselves as employees and not capitalists. But both companies have announced major share repurchase plans. ANF announced a $1.1 billion authorization, and AEO announced a $200 million authorization. Both companies appear to be not just authorizing, but aggressively retiring shares.

American Eagle had a weak Q1, and has suspended guidance, although management is optimistic for the second half of the year, and is preparing for the back to school season, which is their most important quarter. Abercrombie had a strong Q1, and I have to give credit where credit is due, management has been executing at a high level in order to affect this major brand turnaround. But is Abercrombie worth more than twice the valuation of American Eagle? I don’t believe so, but maybe I shouldn’t fight against momentum in this meme market.

I think that odds are good that short term traders will make money on ANF in the very near future. But I also think the odds are good that over time, AEO is a relatively predictable 2x to 3x return as it reverts to past peak multiples within two or three years if we hit an upswing on the consumer cycle. Just keep in mind that the bottom might not be in, so leave some space in your allocation to average down. And also keep in mind that retail is a terrible business, I am interested in AEO for the rerating, not for the long term compounding.

I find the tortoise more interesting than the hare generally, but also in this case specifically, and I plan to start a position in AEO. But I would not be surprised to learn that many of you would choose ANF here, and they would probably shout, “have fun staying poor,” while they execute the trade. For an agile trader, ANF should be a lot of fun over the next six months, but it isn’t the right game for me. American Eagle is more my speed.

American Eagle Outfitters (AEO) $10.16: $25.89 by the end of 2027